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Interest rates still boring at 0.5%

The Bank of England has held rates for the 18th month in a row - surprise, surprise. And economists say it's going to stay the same for a while to come.

by Emma Haslett

Published: 08 Sep 2011

Last Updated: 06 Nov 2012

It’s been 18 months since the Bank of England made any changes to the interest rate, so economists stifled a collective yawn when the Monetary Policy Committee today announced its decidedly predictable choice to hold it at 0.5%. Things are getting so bad around Threadneedle Street, MPC members will be referring to it as the ‘boring rate’ before much longer. What is marginally more noteworthy is that the BBC has figured out during this protracted period of interest rate monotony there has emerged something of a wealth divide between the young and the old. And we’ll be honest: it’s not looking good for the elderly…

According to the BBC’s figures, savers have lost out on £43bn worth of interest payments since rates were cut to 0.5% in March 2009 – while mortgage borrowers have actually gained £51bn, after their payments fell. What’s interesting is that among savers, pensioners – many of whom had lived quite comfortably on the interest payments on their savings – are some of the biggest losers. At the opposite end of the scale, families who had been struggling to pay off their mortgages have benefited – which, considering inflation has pushed up the price of everything from school uniforms to food, has got to be a relief.

Can the Bank do anything to help those savers? In short, not really. ‘Neither a lender nor a borrower be,’ Fathom Consulting and former BoE economist (and MT blogger) Erik Britton told MT this morning. ‘Lenders have lent too much and too cheaply, and borrowers have borrowed too much.’ Now both sides are trying to scale back their losses.

The question on everyone’s lips, of course, is when the MPC is going to shed its ennui for long enough to raise rates again, the argument being that by raising them, it’ll knock back inflation (which, for those aforementioned families, would be even more helpful). Although, according to Britton, the BoE may well opt for further quantitative easing instead. ‘We think it’s likely they’ll do more QE to try and support growth,’ he said. Although, he added, any QE has to be more than just buying up Government gilts. ‘[The Government] should channel it into something more creative than just buying Government bonds. As Einstein said, the definition of insanity is carrying on doing the same thing again and again and expecting different results.’

But whether the MPC opts for more QE (which, equally boringly, remains at £200bn), or raises interest rates, or both – Britton said there’s little chance of anything happening soon. ‘It’ll be well into next year,’ he said. Don those nightcaps – it’s going to be a long, dull wait.